Author Topic: 4% rule- But if you want to leave money for your kids? Use 2% rule?  (Read 3055 times)

andysandp

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I understand the 4% Rule, but what if you want to leave money for your kids? 

The 4% Rule gives you enough to live on for 30 years, but if you happened to retire on bad market timing, you would have almost 0 to give to your kids.

How much would you be able to leave to your kids if the markets were average?

How much would you be able to leave to your kids if you use the 3% rule, or even 2% rule?

Any thoughts?
« Last Edit: April 03, 2017, 06:22:28 PM by andysandp »

Heroes821

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #1 on: April 03, 2017, 07:59:53 AM »
Well my thoughts are this, if you teach your kids the way of the Mustache successfully and you have lived off of your investments at the 4% rule until the point you are dying of old age. 80, 90, 100 years old? Your kids are probably grandparents of their own by then and have hopefully passed down the same financial teaching you taught them and have no need of your stache.

Obviously this is a completely different story if they have disabilities or other issues that require adult care etc. If my kids are still kids or under 30 leaving them something substantial would be nice and helpful to them and potentially their children, but if I'm old enough to be a great grandparent when I die, my kids better of learned how to live below their means and save and invest to a point where anything I leave them is just a bonus.  If they do need that bonus because they didn't learn those skills then I don't want them getting any of my stache and squandering it on useless keeping up with the jones' crap.

That's my 2 cents.

TheAnonOne

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #2 on: April 03, 2017, 08:03:58 AM »
About 50% of the time under the 4% rule you were exceptionally wealthy after 30 years.

3% is basically guarenteed to go up over time.

2% and you probably worked too long, for this forum at least. Keep in mind, if you needed 1.5m for 4% you now need 3m, which might add a decade or more to your career.

It is a large price to pay.

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BeanCounter

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #3 on: April 03, 2017, 08:18:55 AM »
The 4% WD rate is supposed to preserve your portfolio principle. That's why using that WD rate should keep you from ever running out of money. Sure there will be years where you have losses, but those should be countered by years that you have gains greater than 4%.
If you believe that the sky is falling and we'll never see returns to support 4%, then use 3% but understand that you'll have to increase your FIRE number substantially.

Retire-Canada

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #4 on: April 03, 2017, 09:01:28 AM »
Any thoughts?

In most cases [using historical data] you will end up with more $$ at the end of 30yrs than you started with adjusted for inflation. The average is double and the median is ~1.5x. If you want to help your kids out financially just pay for their schooling and put aside a small investment account for them. If you sock away $25K for them in 30yrs it will be worth ~$200K inflation adjusted @ 7%, plus your stash, plus what your home is worth. How much money do they really need?

You are far better off working less and being able to spend more time helping them become useful, happy human beings than working many extra years chasing a stupid low WR so that one day you can hand them a fortune. Thing is no amount of $$ you give them 30yrs from now will be 1) worth more than time spent with them when they are developing and 2) enough that they can't fuck it up/spend it and go broke if they end up being crappy people.

talltexan

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #5 on: April 03, 2017, 09:05:32 AM »
People here are very specific about asking for investing policy statements.

What about Parenting Policy Statements: what problems do you ask your children to solve for themselves? What problems do you provide resources to help them solve?

Data show that bequests are typically to adult children who have already created some financial foundation. Do you want your bequest to be a tool for education? debt-free Housing? Some knowledge of your children's strengths and weaknesses will affect the answer here.

My parents and in-laws are very generous in providing to our family vis-a-vis travel (when they are a part of it) and childcare (which gives them extra time with grandkids). These are things that they value more than accumulating a larger estate. I think values determine estate planning, but you've not really shared those as part of the post.

Scortius

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #6 on: April 03, 2017, 11:04:43 AM »
What other people said about portfolio performance, but as for the impact of leaving an inheritance, I would strongly suggest you at least read the Millionaire Next Door (if not many of the other books recommended here) before you start making concrete plans on how to pass money to your children.

SeattleCPA

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #7 on: April 03, 2017, 11:14:22 AM »
I think the 4% rule (or even better a variably withdrawal rate) works great for leaving your kids something.

Really what you're saying to your kids is, "Kids? Probably you're going to get a nice inheritance. But you shouldn't totally bank on it. Bad stuff can happen."

That seems pretty optimal if he encourages kids to work and save.

BTW, remember too that if your portfolio failure rate is 5%, that doesn't mean there's a 5% chance kids get zero. You need to factor in chance you will die before the portfolio would have failed.

Gronnie

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #8 on: April 03, 2017, 03:09:35 PM »
I understand the 4% Rule, but what if you want to leave money for your kids? 

The 4% Rule gives you enough to live on for 30 years, but if happened to retire on bad market timing, you would have almost 0 to give to your kids.

How much would you be able to leave to your kids if the markets were average?

How much would you be able to leave to your kids if you use the 3% rule, or even 2% rule?

Any thoughts?

The majority of the time (in the past, and remember, past performance does not guarantee future results) you would end up with more money than you started with at the time of your death under the 4% rule.

There seems to be a lot of misunderstanding of the 4% rule. It doesn't mean your portfolio will be gone after 30 years, it doesn't mean it will last forever, it isn't designed to be an amount that preserves your principal.

It simply comes from the Trinity Study, which showed you can have a high confidence of not running out of money in 30 years if you follow the 4% rule. The 4% rule means you can start out in year 1 withdrawing 4% of the portfolio, and then every year after that you withdraw that same amount adjusted for inflation - and in most 30 year periods you will not have run out of money.

maizeman

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #9 on: April 03, 2017, 03:26:53 PM »
How many kids do you have? At what age do you want to leave the money to them? Should it be enough for them to FIRE as well? And do you anticipate them passing it on to their kids and so on? Multigenerational wealth is tricky (particularly if you want to keep steering how your family can use the money from beyond the grave, which means a trust, which means much much higher tax rates on new income).

This seems like something that _could_ be modeled. Essentially you want to be taking out some money to spend, but leaving enough money in the principle so that it doubles once per generation (assuming two kids) so each of your kids inherits a stash that can both provide them with a base line income, plus grow enough to provide each of their two kids with income, and so on. The doubling time of a 4% investment is something like 18 years, so unless you're anticipating a quite short (but biologically feasible) generation time, it seems likely there is SOME withdrawal rate that meets those criteria. Depending on your risk tolerance however, it might be a quite low one.


steveo

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #10 on: April 04, 2017, 01:44:05 AM »
I'm honestly questioning if this is a legitimate question. Can you really imagine working until you get to 2% ? Is that really worth it ?

farfromfire

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #11 on: April 04, 2017, 02:12:40 AM »
In short, use the bucket system.

Set up a taxable/529/both, where the goal is that this money goes to your kids. Set an allocation and yearly deposit that fit with that goal, ie how much do you want them to get and when.

Once every few years, re-calculate how much you invest in each account. This way, when both your personal goals and children's goals are met, you know you can fire.

andysandp

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #12 on: April 04, 2017, 07:18:01 AM »
About 50% of the time under the 4% rule you were exceptionally wealthy after 30 years.

3% is basically guarenteed to go up over time.

2% and you probably worked too long, for this forum at least. Keep in mind, if you needed 1.5m for 4% you now need 3m, which might add a decade or more to your career.

Ok let's stick to the 4% withdrawal rate.

Does anyone know what is the % chance for how much I would have after 30 years using 4% rule.

For example if I had 1 million dollars, and used the 4% rule, AFTER 30 years I would have:

90% chance of having at least 40 percent of what I started with (including inflation)
70% chance of having at least 50 percent of what I started with (including inflation)
50% chance of having at least 100 percent of what I started with (including inflation)
40% chance of having at least 150 percent of what I started with (including inflation)
30% chance of having at least 200 percent of what I started with (including inflation)
5% chance I would have 0 of what I started with.

Etc..

I just made up these numbers because I don't know what the real chances are.  Does anyone know the real numbers?  And yes I know past performance doesn't guarantee future returns.



« Last Edit: April 04, 2017, 07:29:09 AM by andysandp »

Retire-Canada

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #13 on: April 04, 2017, 07:27:14 AM »
I just made up these numbers because I don't know what the real chances are.  Does anyone know the real numbers?  And yes I know past performance doesn't guarantee future returns.



Middle chart is for 4%. For your question you can ignore the gray [dying] and the red [gone broke], light blue [less than original stash] and dark blue [equal or more than original stash] = 100% of the money options. Just eye balling it at 30yrs it looks like you have an 80% chance of having your original stash or greater. Keep in mind this doesn't include getting SS, inheritance or earning $1 after you FIRE.

You also have a greater chance of being dead than going broke or having less than your original stash combined.

Maizeman generated the charts.
« Last Edit: April 04, 2017, 07:29:15 AM by Retire-Canada »

GreatLaker

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #14 on: April 04, 2017, 08:56:06 AM »
If you have a specific amount you want to leave to the kids, just calculate the present value needed to have that amount at your life expectancy. Then segregate that amount in your portfolio, either in a different account, or notionally in your overall accounts.

Then subtract that amount from your portfolio before you calculate your initial 4% withdrawal amount. Easy peasy.

Most retirees dogmatically following the 4% rule will end up with much larger portfolios than they had when they retired. A small % of retirees who experience extremely bad investment returns some time during retirement will exhaust their portfolio during a 30 year retirement. Remember the 4% initial withdrawal rate was intended to ensure a portfolio has a high survival rate even during adverse economic conditions like the great depression and the stagflationary 1970s.

andysandp

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #15 on: April 04, 2017, 09:52:14 AM »
 Retire Canada, you said "Just eye balling it at 30yrs it looks like you have an 80% chance of having your original stash or greater."

When you said 80% chance of having your original stash or greater, does that include inflation?

Thanks!

Retire-Canada

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #16 on: April 04, 2017, 09:54:16 AM »
When you said 80% chance of having your original stash or greater, does that include inflation?

Yes. Any retirement data spanning 30yrs+ has to adjust for inflation or it would be largely useless as a quick reference in a chart like this.

andysandp

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #17 on: April 04, 2017, 04:24:08 PM »
The Chart doesn't really show exactly how much you would have after 30 years.  The blue just saids Stash, but how do you know if the Stash after 30 years is 10% more, 50% more, or 100% more?  Same thing with light blue.  How do you know if Stash below start is how much below?

This chart is helpful but does anyone else have more exact numbers and percentages?

Thanks!
« Last Edit: April 04, 2017, 04:25:52 PM by andysandp »

seattlecyclone

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #18 on: April 04, 2017, 04:32:11 PM »
Play around with http://cfiresim.com/. Using the defaults ($1 million portfolio, 75/25 asset allocation, 30 year retirement, 4% withdrawals), you end up broke 5% of the time after 30 years, but the median portfolio value is $1.53 million. Half the time you end up with at least 153% of your start value. You can look through the detailed spreadsheet it generates for more information.

Retire-Canada

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Re: 4% rule- But if you want to leave money for your kids? Use 2% rule?
« Reply #19 on: April 04, 2017, 05:00:53 PM »
The Chart doesn't really show exactly how much you would have after 30 years.  The blue just saids Stash, but how do you know if the Stash after 30 years is 10% more, 50% more, or 100% more?  Same thing with light blue.  How do you know if Stash below start is how much below?

This chart is helpful but does anyone else have more exact numbers and percentages?

Thanks!

In most cases [using historical data] you will end up with more $$ at the end of 30yrs than you started with adjusted for inflation. The average is double and the median is ~1.5x.

Posted above. As Seattlecyclone notes if you want a more detailed breakdown cFIREsim is a good option.